Ameris Bancorp (ABCB) Q4 2021 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to today's Ameris Bank Fourth Quarter Earnings Conference Call. My name is Emma, and I will be coordinating your call today. [Operator Instructions]. I will now pass over to your host to begin, Nicole Stokes, Chief Financial Officer. Please go ahead.

Great. Thank you, Emma. And thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our Web site at amerisbank.com. I'm joined today by Palmer Proctor, our CEO; and Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening general comments and then I will discuss the details of our financial results before we open it up for Q&A. But before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We have list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our Web site. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to Palmer for opening comments.

Thank you, Nicole, and good morning, everyone. I appreciate you taking the time to join our call this morning. I'm really pleased with the financial results we reported yesterday and excited to share some of the highlights from the quarter as we had a tremendous year for 2022. For 2021, we earned a record 368.7 million or $5.29 per diluted share on an adjusted basis, which is up 22% over 2020 results. This represents an ROA of 1.69% and a return on average tangible equity of 20.19%. We had a fantastic fourth quarter as we earned 81.5 million or $1.17 per diluted share on an adjusted basis, and this represents a 1.40% return on average assets and a 16.88% return on tangible equity. On the balance sheet side of things, we were extremely pleased with our organic growth. Exclusive of PPP runoff and our Balboa acquisition, loans grew over 383 million for the fourth quarter or over 10% annualized. And that brings our full year 2021 loan growth to 1.4 billion or 10.5%, excluding the PPP runoff. The Balboa acquisition brought another 665 million of loans on our balance sheet. We continue to anticipate 2022 loan growth in the upper single digits. We certainly have the liquidity to fund it, as our deposits have continued to grow. Our total deposits now are approaching $20 billion with noninterest-bearing deposits accounting for over 39% of total deposits. Nicole is going to provide more detail shortly, but know that we remain focused on ways to safely deploy our excess liquidity. As to capital position, it remains strong. We've consistently said we're focused on tangible book value growth. And while we did have some dilution in the fourth quarter from the Balboa acquisition, we still grew tangible book value by over 10% in 2021. And with anticipated earnings, we forecast last quarter's tangible book value within the next quarter. As reported last quarter, we have a share repurchase program outstanding until the 31st of October this year. We repurchased 1.3 million during the fourth quarter, which leaves approximately 78 million left on that program. And while we don't anticipate executing on this during the first quarter of 2022, we do like having the optionality if the right opportunity presents itself. As for the dividend, we still remain very comfortable where the dividend stands today. Moving on to credit. Jon Edwards, our Chief Credit Officer, is with us today and certainly available to take any credit questions after our prepared remarks. But overall, we are very pleased with our credit metrics. We had net recoveries of $556,000 this quarter, which is the second consecutive quarter of net recoveries. NPAs were 43 basis points at year end. Loans that remain on deferral at the end of the quarter were minimal. And those that remain are primarily mortgage related. Our allowance coverage ratio, excluding unfunded commitments, was 1.06 at the end of the year. In the fourth quarter, we were proud to announce our purchase of the Balboa Capital Corporation, which is a FinTech provider business lending solutions to small and mid-sized businesses nationwide. We've already begun to integrate and leverage their technology into the rest of the Bank. So when you combine their technology with our strong Southeastern markets, it only reinforces the overall potential for us for 2022. And in terms of momentum, I wanted to share some of the core fundamentals driving our positive outlook this year. We have an asset-sensitive balance sheet with over 40% variable rate loans. And then there's actually another 10% on top of that, which is short duration fixed rate loans that behave more like variable rate loans. So we're well positioned in terms of margin expansion and NII expansion. We have a strong loan pipeline. And even after we had our best production quarter in the history of the company, it still remains robust. We continue to meet our growth expectations and a lot of that we are very fortunate to be in some of the best markets within the Southeast and more importantly have the experienced bankers to help us execute in those markets. We've also got $70 million of revenue anticipated for the growth and forecasted from Balboa, which will be very meaningful, which allows us to target an ROA in the 1.30% to 1.40% range and a return on tangible common equity well above 15%. So you combine all that with a culture of expense control, that way we should be able to still maintain a sub 55% efficiency ratio. I'll stop there now and turn it over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. For the fourth quarter, we're reporting net income of 81.9 million or $1.18 per diluted share. On an adjusted basis, we earned 81.5 million or $1.17 per diluted share. And that's when you exclude the servicing asset recovery, merger and conversion charges and gain on sale of premises. Our adjusted return on assets in the fourth quarter was 1.40%, and our adjusted return on tangible common equity was 16.88%. For the full year 2021, we're reporting net income of 376.9 million or $5.40 per diluted share, which is a record year for Ameris. On an adjusted basis, we earned 368.7 million or $5.29 per diluted share, which is still a record. That compared to 300.5 million or $4.33 last year. That brings our full year ROA to 1.69% compared to 1.56% last year and our full year ROTCE to 20.19% compared to 19.77% last year. For the full year 2021, we had a 10.8% increase in tangible book value to end at $26.26. Our tangible common equity ratio was 8.05% at the end of the year compared to 8.88% at the end of the third quarter due to the Balboa acquisition. And a lot of this solution is a timing issue. We added those assets right at the end of the quarter without the benefit of the Balboa earnings. In addition, the approximate $3 billion of excess liquidity on our balance sheet negatively impacted this ratio by 135 basis points. If you exclude that cash from total assets, our TCE ratio would have been around 9.39% at quarter end or at year end, which is well above our stated target of 9%. So we estimate that the TCE ratio will be closer to 8.5% by the end of the first quarter and well above 9% by the end of the year, if not sooner. We continue to be well capitalized and we feel comfortable with our capital and dividend level. Then moving on to net interest income and margin. Our net interest income for the quarter increased by $5.2 million, of which $3.4 million was in the core bank, $3.6 million was from Balboa and then those two increases were offset by a $2 million decline in the mortgage. Our net interest margin declined 4 basis points which was consistent with our previous guidance from 3.22% in the third quarter to 3.18% this quarter. Our yield on earning assets declined by 5 basis points and our total funding cost decreased by 1 basis point. Kind of the leading factors into the margin squeeze, we had 7 basis points of compression due to that growth in excess liquidity. And that was offset by 2 basis points of additional PPP accretion, and then that 1 basis point of improvement in our total funding cost. So excluding that excess liquidity, our margin would have actually improved this quarter. On Slide 8, you can see the approximate $3 billion of excess liquidity and how it accounts for 54 basis points of a negative margin compression from one year ago. And without that excess liquidity, our fourth quarter margin this year is exactly the same as it was last year. In addition, we had about $314 million of Balboa debt that was still sitting on the balance sheet at the end of the year. We've paid that off. It was accretive to the margin and we anticipate that Balboa will positively impact the margin going forward. As we stated, we have about $3 billion of excess liquidity. We anticipate net loan growth this year in the high single digit, kind of that 7% to 9%, which is about 1.1 billion to 1.4 billion of growth. That leaves about 1.6 billion of excess cash to prepare for the cyclical deposit runoff and to begin purchasing investments in the bond portfolio as rates begin to rise. From an ALLL modeling standpoint, we've positioned ourselves to be asset sensitive with NII increasing 6% to 7% in the [indiscernible] environment. Basically every 25 basis points of rate movement increases our net interest income by about $9.5 million to $10 million. During the fourth quarter, we recorded 2.8 million of provision expense. That was 7.5 million on the newly acquired Balboa loans, offset by $4.7 million release of reserves in the other divisions due to improvement in the model loss rate. Within the Balboa provision, approximately 7.3 million is the CECL double-count on the non-PCD loans and approximately 200,000 was to cover gross and net charge-offs. We also have approximately 9.1 million of allowance on the PCD loans for a total reserve of 16.7 million on [indiscernible] loans. As Palmer mentioned, we had net recoveries for the second consecutive quarter. Our ending allowance for loan losses was 167.6 million, including the unfunded commitment reserve and allowance for other credit losses, it was 200.8 million at year end compared with 188.2 million at the end of last quarter. Noninterest income increased 5.2 million for the quarter. We recorded a $4.5 million servicing rights recovery compared to $1.4 million impairment last quarter. So excluding that MSR activity, total noninterest income declined slightly. Similar to last quarter, retail mortgage originations as a percentage of our pre-provision pre-tax income continued to decline, now representing only 13%, down from 50% this time last year. While production in the retail mortgage group declined to 1.8 billion this quarter, the average gain on sale increased to 3.27% compared to 3.17% last quarter, which helped offset some of the production revenue decline. The open pipeline at the end of the year was 1.6 billion compared to 1.9 billion at the end of last quarter. Total noninterest expense increased by 1.2 million from 137.2 million last quarter to 138.4 million this quarter. However, excluding the loss on bank premises and the merger charges, noninterest expense actually declined 1.4 million during the quarter. In addition, we had approximately 1.4 million of operating expenses from Balboa. So excluding those, our operating expenses would have declined 2.8 million for the quarter which is exactly in line with the estimate we gave last quarter. We anticipate operating expenses from Balboa to increase overall noninterest expense by approximately $6 million a quarter. However, they are anticipated to operate at a sub 40% efficiency ratio. So these expenses are more than offset by their revenue generation, and Balboa is overall accreted to our efficiency ratio. We were pleased with our efficiency ratio and the overall progress we made. We came back in for the quarter under 55%. We came in at 54.85% compared to 56.56% last quarter. For the full year, we were right at 55%. We had guided to 52% to 55%. And with the tight margin we have seen in the declining mortgage revenue, we were pleased that we came in within our projections. We continue to prudently examine other noninterest expense, and we anticipate minimal increases in the core bank and actual decreases in the retail mortgage segment variable costs as that production is decreased and expenses decrease back to normal levels. Although there's always cyclical first quarter cost such as payroll taxes, we do continue to believe in efficiency ratio in the low to mid 50s or sub 55 is reasonable and achievable. On the balance sheet side, we ended the year with total assets of 23.9 billion compared to 22.5 billion last quarter and 20.4 billion last year. We were extremely pleased with our organic loan growth of 383.9 million or 10.4% annualized for the fourth quarter. As you can see on Slide 16, we had 319 million of headwinds against 701 million growth in CRE, C&I and residential. PPP loans declined 147 million and indirect loans declined 59 million. Excluding the PPP runoff, our net loan growth was 536.6 million or 14.8 annualized for the quarter. For the full year, our loan growth was 727.5 million or 5%, including the PPP runoff. But excluding that PPP runoff, our net loan growth was 1.4 billion or 10.5% for the year. We have approximately 134 million of PPP loans left and 265 million of indirect loans remaining. We anticipate the headwinds from the runoff in both of these portfolios to subside sometime early in '22. We already discussed the excess liquidity you can see in other earning assets. Due to the tremendous deposit growth we've had, deposits grew 832 million this quarter with noninterest-bearing growing 158 million and interest bearing growing 674. Included in this deposit growth this quarter was approximately 540 million of cyclical municipality money that we expect to run back out within the first few months of 2022. So to wrap it up, we are really excited about this year. We're well positioned on our balance sheet as rates start to rise. We're excited about the Balboa acquisition and the positive impact it has on our operating results, margin, net income and efficiency ratio. As always, we're watching expenses and finding ways to pay for new technology through a reallocation of resources. We feel the excitement and momentum throughout our company as our bankers continue to work hard to provide top performance and shareholder value. And with that, I will wrap it up. I appreciate everyone's time today. I'm going to turn the call back over to Emma for any questions from the group.

Thank you. [Operator Instructions]. Our first question comes from Brady Gailey from KBW. Please go ahead. Your line is now open.

Thank you. Good morning, guys.

Good morning, Brady.

So mortgage really held in quite nicely in the fourth quarter. I know volume was down a little bit, but gain on sale was up a little bit. As we head into 2022, I think most people think mortgage will kind of continue to normalize lower. How do you think about gain on sale and volume at Ameris this year?

Brady, I will tell you that we're still very encouraged by the contribution that mortgage will make. And I do think what you're going to start seeing as mortgage normalizes throughout the industry is that seasonality that you would typically see in mortgage, especially in first quarter, is going to be there for all of us. So that will normalize. We feel very comfortable based on our pipeline of where we are in terms of the contribution going forward. And I think what you'll find is that first quarter will be adjusted as it historically has been in terms of seasonality, and then second, third quarter will be very strong. The margin, we were pleased. A lot of that has to do with timing, the pair-off and everything for the fourth quarter. And as we go into the first quarter, I think we'll still feel a little more pressure, downward pressure on that gain on sale margin. But in terms of the volume itself, we remain encouraged and positive. And one of the things too that we're pleased to see is that it will still be a meaningful contribution, but a lot of the growth we're also seeing is reflected in a lot of the other areas of the company. So that's kind of our take on mortgages. Our outlook is still very positive.

Okay, great. That's helpful. And then assuming deposits don't grow at all this year and you guys do the upper end of your loan growth guidance, you're still going to have a decent amount of excess cash on the balance sheet. So how do you -- the bond book really has been pretty stable, if not kind of down post COVID. So how do you think about growing the bond book, especially as the long end of the curve hopefully continues to head higher?

Great. Brady, that's a great point. So as we said, we have about $3 billion of excess liquidity. And one thing that I wanted to make sure that I know was in our prepared remarks, but we had about $350 million of Balboa debt that because of the timing, there were some 30-day notices on that. So we weren't able to pay that off before year end. But it's already been paid off this year. So there's that piece. And then again, about $0.5 billion of public fund cyclicality that we think will run out in the first quarter. So that's 1 billion right there in those two items. And then if you have somewhere between 1.1 billion and 1.4 billion of loan growth, that leaves us about $700 million to $1 billion to be able to put in the bond portfolio. If you look historically, we're down to 2.5% of earning assets. And we'd like that bond portfolio to be kind of close to about 7.5% of total assets. You go back to 2019, we were over 9% of earning assets. So if we added 1 billion to 1.1 billion in our bond portfolio, we would be back to where we were in 2019.

All right, that's helpful. And then finally for me, there's a lot of talk industry-wide as far as what's going to happen to NSF fees and overdraft. Any thoughts on kind of how Ameris fits into that and can you just share with us what was the level of NSF and overdraft when you looked at last year?

Sure. So when you look at our service charge income on our income statement, about 36% of that is NSF fees. So it was about $16 million in 2021, which was already down. It's been coming down gradually over the last couple of years. We've budgeted a 25% decline in that, so about a $4 million decline is already in our internal budget. About 90% of those fees are consumer. We do have a plan that we're in the process of developing and we do think that there will be an impact to that. As I said, we've already budgeted a 25% decline in our budget.

Okay. Nicole, that 16 million, is that just NSF or is that NSF and overdraft?

That’s both, NSF and overdraft.

Okay, great. All right. Thank you, guys.

Thanks, Brady.

Thank you. Our next question today comes from Jennifer Demba from Truist. Please go ahead. Your line is now open.

Good morning. Could you guys talk about the increase in problem loans this quarter and give us some detail behind that?

Yes, Jennifer, we put a slide on that in the deck. It's Slide 18. There were really three categories of loan increases. One was the purchased credit deteriorated loans that we bought from Balboa Capital that came on in $9.6 million. There's about $25 million worth of mortgage loans that had been under CARES Act provision previously, and we're working through the mod programs, but we were kind of in that middle. So there were over 90 days, and those came in to the NPA number. And then there was about $3 million worth of premium finance loans. But those are very short term kind of transitory. We'll get the unearned premium sometime quickly. And so those will move on off. And that was offset by collections and recoveries of over $7 million; OREO, Repo and just general collection. So, all-in-all, it's about $31 million worth of increase for the quarter, a third of which was really part of the Balboa acquisition.

Okay. And, Palmer, could you talk about your acquisition interest going forward at this point?

What interest? I missed the first part of the question?

Could you talk about your acquisition interest going forward?

Yes. Right now, obviously, we remain focused on fully integrating the Balboa. And the beauty of that transaction is it's already up and running and we're levering the technology right now, even through part of the core bank and we'll continue to focus on that. But I will tell you that acquisition, as efficient as it was, it doesn't preclude us from looking at other opportunities down the road. But when you look at the -- first and foremost, as I've always said, we're focused on organic growth. And that's evident in the numbers we've generated and produced, and I couldn't be more excited in terms of the pipelines that we're seeing and where we're seeing that growth, not only geographically but also the lines of business. So that is our first and foremost. That's where our attention remains. But we will remain opportunistic in terms of looking at other opportunities out there. And the Balboa transaction wouldn't preclude us from doing so if we chose to look at something.

And what kind of deals interest you at this point?

Well, I'll tell you if we could find more deals like this Balboa deal, it would be great. So I think there's both banking and non-bank opportunities out there. So we're pretty open to look at it at both types of activities. Just depends on what makes the most sense for us.

Thank you.

Yes, sure.

Thank you, Jennifer.

Thank you. Our next question today comes from Casey Whitman from Piper Sandler. Please go ahead, Casey. Your line is now open.

Thanks. Good morning.

Good morning, Casey.

Palmer, I think you mentioned in your prepared remarks 70 million in revenues from Balboa that you're assuming. Just wondering, does that include the fee income piece or is that just the NII piece?

That includes both.

It includes the fee income piece. Okay. Thank you. And wondering, can you put some numbers around where we could see the margin shakeout in the first quarter? I know there's just a lot of moving parts with the Balboa yields, a full quarter of that, and then the debt paid down and presumably less cash. But we could maybe see a big jump, right, in the margin in the first quarter, so maybe help us just put some numbers around that?

Sure. So we are guiding towards kind of mid single digit, 3% to 5%. And so while we'll see the impact of Balboa, which is an upward movement, we are anticipating some of the PPP coming out. I don't know if you -- when you think about core margin, absolutely an increase. So when I talk about reported margin, we've got the Balboa impact of a positive, we've got the PPP coming down and then we've also got -- we had a little bit of a bump in the bond portfolio this quarter because of an early --

Maturity.

Maturity, thank you. My word went missing there. So based on kind of those moving parts, we're seeing kind of mid single digits. And then on top of that is where I would add the excess liquidity benefits. So every $100 million that we can put to use is about 2 basis points on the margin. So if we can see some of these excess liquidity either exit the bank from the usual deposits from paying off the Balboa debt so we can see it increase a little bit more, but just keeping liquidity flat we would be kind of in an up 5 basis point maybe net.

Okay. And minus how much you have left in PPP fees to recognize?

Yes, so PPP fees that we have left is 5.8.

Okay. All right. Thank you for taking my questions.

Sure. Thank you.

Thank you. Our next question today comes from David Feaster from Raymond James. Please go ahead, David. Your line is now open.

Hi. Good morning, everybody.

Good morning, David.

It was nice to see the increase in production in the quarter, north of $1 billion, broke out of that kind of 900 million run rate that we were at. Just kind of curious, what do you think drove the increase in the quarter? Is it an increase in demand? Is it the new hires hitting stride, or just more increased willingness to compete on pricing? And then just maybe help us think about how the pipelines look ahead of the new year and maybe how the competition might have changed?

Yes, sure. We were very pleased with the growth. Now we did benefit from a lot on the CRE side, a lot of those loans migrating from a construction phase into a permanent phase for us. And then we also saw a nice increase in our C&I activity. And when you -- I guess that's probably one of the most encouraging things I've seen is where our focus has been is where we're seeing a lot of that growth. We've also always had meaningful contributions coming from mortgage and from premium finance and some of the other areas, and now Balboa. But when you look at the core bank, the pipelines remain strong. In terms of the outlook going forward, the pipelines are full. The business is there, but the discipline on our side is also there, because what we have to be mindful of is there's a lot of competition driving rates, continue driving down, which is evident in the margin that everybody's seeing the pressure there. So while we certainly want to have good relationships that we're going after, we're not going to be stupid about it in terms of setting ourselves up for margin compression longer term. So there are several deals that we've had that have fallen out of a pipeline strictly because of pricing. So while I'm pleased with our current pipeline, extremely pleased, as I said, we had a record production in pipeline in the fourth quarter, and that is spilling over in first quarter. But there's going to be some fallout in there just due to pricing to your point in terms of competition. So it's anybody's guess at this point of how low people are willing to go, but I can tell you we have an internal threshold and we're pretty disciplined about that. So there will be deals that we will pass on. But in terms of our outlook and our optimism, the business is out there. And we are certainly going to get our fair share of it. And more importantly, [indiscernible] focused on.

Just following up on the pricing discussion, it looks like new loan yields were down in the quarter kind of to your point. Just curious, where are you seeing more pressure? Do you think -- it looks like it's mostly on the variable rate side. Where are you seeing the most pressure? Do you think it's kind of troughed or have you at least seen a stabilization in new loan yields, just kind of given the increase in the tenure?

I do. I think people have realized now that the pricing is -- I think we've kind of hit a bottom. I don't see it going down anymore. But that being said, it's still extremely competitive out there. And then what happens is beyond rate is structure. And you don't want to start compromising too much on structure. So it's a balancing act. But I do feel like to your point that we have hit the trough and we should start seeing some moderation there. In terms of the competition and pricing, I don't anticipate it going lower. I would only see it actually improving from this point going forward, especially as it pertains to the C&I efforts.

Okay, that's helpful. And then maybe following up a bit on that, payoffs and payouts are obviously still a headwind. I'm just curious what you're seeing on the pay down front. It kind of sounds like you might be passing on more deals just for competitive reasons or aggressive structure or pricing. Just curious, any trends you're seeing on the payoff and paydown front? And then just any thoughts on the recruiting side and your appetite in the new hire, lender hire market?

Yes. I think what we're seeing on the paydowns with our existing C&I customers, our utilization rates are actually up on C&I. The CRE is where we are seeing some paydowns and a lot of that has to do more with the investor property where people are getting premium prices for the properties and you can't fault them for moving the property or selling the property. So I think there will still be downward pressure there or a headwind to contend with. But we feel very comfort with our ability to still maintain our current production levels, and that all comes back to the bankers to your point. We hired 17 bankers this year. And what we were able to do, to Nicole's point earlier, that's reallocating resources. We hired 17 folks, but actually moved out 21 folks. And that's all just a function of attrition. And so net, when you look at from an expense standpoint, we're actually down four people on that side, but we're actually up in production. So the folks that we have are more productive. And we've been very consequential about that. And I think that will continue to serve us well when you look at our expense and overhead. So we feel very good about the markets we're in. We saw a lot of good growth this past quarter, fourth quarter, coming from Atlanta and Florida and also the Carolinas. And I think that will continue.

That's helpful. Thanks, everybody.

Thank you. Our next question today comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead, Christopher. Your line is now open.

Thanks. Good morning. Palmer or Nicole, could you just elaborate on a little bit of the toolset at Balboa? What gives you kind of inside the company to kind of process, improve and kind of how that's going to play out in the future quarters?

I'll talk about the technology side of it, and then Nicole can get into some of the other benefits. But one of the things that really attracted us to Balboa was the technology. It is a FinTech. And the thing that's nice too is it gets us in front from a point of sale concept in front of a lot of opportunities that banks are losing out on. And so while they also got the vendor financing, the point of sale was absolutely critical. So that's a new venue for us. But the technology in and of itself, we call it -- they've got a Portal360, which is a very efficient platform, which gives turnaround times immediately. You're getting a response within a day or within hours. And our interest was trying to take that technology, Chris, and leverage it throughout our core banking platform. So when you think about all the small business lending we do through our retail network and for the small business lending activities of the bank, what we're able to do is take that technology and lever it up. So we have already rolled this out and the majority of the commercial group, and then we'll be rolling it out in retail over the next month. So it's that fluid. And the nice thing about this portal is you go in, you key in the information, all the application processing, everything is done, and it's automated. And you're able to give quick return and turn times. And in the beauty of this business, a lot of people ask the question is how are you able to maintain such great yield? It's all about convenience. And it's all about that point of sale. And so we view this as a real opportunity for us. If we had to go out and invest and build this type of platform throughout our operation, it could take us years and millions of dollars. So that's really an added benefit of the company. And then furthermore, in terms of what we can give back to Balboa, they have never had access to, obviously, the capital liquidity that we provide. But in addition to that, they're very excited about helping us lever up our SBA lending activities. And so that should -- we should see meaningful pollination and cross pollination between both sides of the shop there. Nicole, anything else you want to add on.

Sure. I was just going to reemphasize what I said about their -- some impact to our financials that they're accretive on everything. So we're looking at $70 million of revenue, 5.5 million to 6 million a quarter. So even if you go on the high end of that $24 million of expense, they're running at a sub 40 efficiency ratio. So that's accretive. On the margin side, they're expected to have 25 to 30 basis points of impact on the margin. Some of that's going to be offset by going away of the PPP revenue, which is why my margin guidance was where it was [indiscernible] accretive there, so just tremendous opportunity. And I think having a 10% growth in this line is absolutely reasonable and achievable, and we hope to beat that.

Great. That's really helpful. Thanks for that. And you have a natural efficiency already happening at the company, so as you kind of get better internally with the technology, we'll see those results as they occur, right. So there's no kind of definitive number there, but just in general should improve.

That's right. So they are running at a sub 40. And so even when you layer that on, it's accretive to us for sure. And then as we start just growing that book, it will just generate even more.

Got it. And then just a quick follow up. The last several years, the mortgage business has been a regional business in many states and the bank has kind of quietly followed that, particularly in Georgia and in Florida. Does the technology of Balboa or just your ongoing calling effort organically allow you to push deeper into these other markets? Again, it's not an M&A question, Palmer, as much as it is just executing further with the tools you have.

Yes, I think in a perfect world, we would have the same technology that Balboa has utilized throughout our entire company in all our lines of business. The reality is something different. Now we've made tremendous strides in mortgage in terms of utilizing robotics and efficiencies there. But there's a lot more that we can do. And you have to do today to compete with the online lenders. So we continue to push hard there. The majority of -- the advantage of being a regional bank is that a lot of the benefit we get is from our builder and realtor business. That's something that online providers will never have. So we don't ever want to lose sight of that, because that's our bread and butter. But at the same time, I think there's some incremental volume that we can capture through online efforts and coming up with a more user-friendly kind of portal there. So that will be a separate initiative, because as much as I'd love to be able to put the 360 portal from Balboa right into mortgage immediately, it can't happen. But what it does help us realize as a bank is that when you look at how efficient that operation is, it gives you an appreciation for the opportunity you've gotten so many other high volume areas of the company. So when we think about premium finance or mortgage, it really motivates us to start doing the same type of initiatives there to help lever both those lines of business. Does that answer your question?

Yes, it does. Thanks very much. I appreciate the background here.

You bet.

Thank you.

Thank you. Our next question today comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead, Kevin. Your line is now open.

Hi. Good morning. I appreciate you fitting me in at the end of the call here. Most of my questions have been asked, but just wanted to clarify on the margin outlook, Nicole, the 3 to 5 basis points. Is that -- that's expansion, right, not compression?

That's right. That's expansion. And that did not include any impact from the use of that excess liquidity. So if we -- like I said, if the municipal deposits run out, as expected, and then if we have, again, any other deposit runoff, then any use of that excess liquidity is not built into my -- so when I said 5 basis points kind of that mid single digit, that is expansion, excluding use of liquidity. So that should be worst case is a 5% expansion.

And that's for the first quarter we're talking, right?

That's right.

Okay. All right. Just wanted to check. And can you -- I was trying to keep up with you, but couldn't. Would you mind repeating some of that interest rate sensitivity stats that you gave earlier in the call?

Sure. Sorry, I did talk fast. I apologize for that. So we're about 6.5% asset sensitive. So for every 25 basis point in rate hike, we were about $9.5 million to $10 million of additional NII. And then we've got about 40% of our loan book is variable. But we have another 1.5 billion or another 10% roughly that is technically for call report. They were fixed rate loans. But because of their short duration, they behave like a variable rate loan. And so when you add that in, we're about a 50% variable on our loan book. I think that was the high point.

Got it. That’s great. And one last thing just on Balboa. Can you give us a sense for when we look at that loan balance that they brought over, how would you describe the geographic -- how that spread geographically? And how do you expect that to change over time? In other words, they're based out of California. It's nationwide. I understand that. But do you think it will be more weighted toward your banking footprint or not necessarily over time? Thanks.

I think you have to bifurcate, because what we'll have, as I touched on, as we lever the technology throughout the core bank, there's going to be obviously more production coming out of our retail network and our small business lending network from the legacy bank. And so you will see incremental growth there coming out of the markets. But they've got about 17% of their business coming out of California, and then that's equal with Texas and then Georgia and Florida. So it is a nice mix. It's not a concentration in one geographic area. But I think if we can start levering up through the bank, you will see proportionately more of that business coming out of the Southeast if we're successful in levering up the traditional line of business through that portal. But at the same time, they will continue to grow their book in all the markets they're already operating in. And that's primarily driven from a lot of their vendor relationships that they've had for over 20 plus years. So I wouldn't expect to see a huge geographic shift in terms of their focus or concentration on what they already have.

So, Palmer, there's -- what is called Balboa and I assume going forward, you'll still update us on what the balances and the growth are at Balboa. But there's going to be banking growth within your own bank, within your own footprint that's coming through that technology that's not necessarily going to be slotted as Balboa, correct?

Correct. That’s incremental volume.

Okay, great. Thanks very much.

Thank you.

Thank you. Our final question today comes from Brody Preston from Stephens Inc. Please go ahead, Brody. Your line is now open.

Hi. Good morning, everyone.

Good morning.

I've got a handful of questions I'll try to get through here. Nicole, I thought I heard you earlier. It was either pair-off or payout in the mortgage this quarter that helped some of the gain on sale. And I know a couple of quarters ago, you had like some kind of -- a larger kind of pair-off fees. Were there any of that -- was that what drove that this quarter, or maybe I was misunderstanding?

I think that was in one of Palmer’s comment questions where we did see the gain on sale go up a little bit. And some of that is -- and he was comparing it. It can be a timing issue a little bit. And so we're guiding towards that gain on sale in the future, kind of in that 275 to 325 range. But we don't expect it to continue to increase like it did this quarter.

So there weren't any of those pair-off fees that you saw in the second quarter this quarter?

Nothing material.

Okay, great. And then I want to go back to Balboa. It looks like just given how long it was on the balance sheet this quarter, it looked like the yields came in well north of the 9.9% that you had in the deal deck. Were there any additional loan fees that kind of helped juice that yield a little bit this quarter?

No, it's actually -- so those loans are yielding closer in that 11% to 12%. And then we have a purchase accounting adjustment of a premium on those loans. And so because we only were still finalizing all of that purchase accounting, so in our debt where we said the 9.5% to 10%, that's after that purchase accounting amortization. And so because we only had them on the books 20 days and we're still finalizing those day ones, we didn't have an adjustment. But you'll see that expected 9.5% to 10% this next quarter.

Got it. And so I guess -- so should I interpret that as there'll be accretive yield, Nicole, that will flow through NII as well?

Look, it’s the opposite. It’s a premium, so it will be amortized. We haven't had that in a while.

Okay. So that was just -- you hadn't finalized it yet. So that's why the interest income impact was a little bit higher than it otherwise would have been.

That's right.

I guess I want to circle back also to the 70 million from Balboa. You said it was both NII and fees. And it looked like you sold a little bit of the loans this quarter, because there were some fees that went through fee income. But they're running -- I guess for the near 700 million, 9% to 10% kind of loan, they're running at like about 70 million or so in NII right now already, and I know you have growth plans for that. And so I guess what's driving to be 70 million as opposed to something north of that for Balboa revenues?

Yes. Well, a, we're being conservative. And so we don't want to over promise and under deliver. And then the other pieces included in that is in historic -- historically they sold some loans and we expect that to flow and put those on our balance sheet. And so, again, those are projections and we didn't over bake the projections for growth in that number.

Got it. Okay. And the [indiscernible] on the Balboa, it looks like just all-in with the 16, 17 you called out, it's running about 240 to 245, somewhere in between there. Is that where you all expect to run that going forward?

No. Again, was bringing some of that up is that 9.5 million of the PCD loans that we brought the specific reserves on loans. So once those problem loans are worked out, that will come back down to a more normalized, kind of a 1.5.

Got it. Okay. Thank you for that. And I guess maybe moving away from Balboa specifically, if I kind of strip out the impact of Balboa and PPP, it looks like core loan yields were down like 12 to 14 bps or so. And I know you said it's been competitive. But I guess with a big chunk of the production, the total dollar production being CRE, is it tighter spreads in CRE that's driving that? It looks like a lot of banks are returning to growth mode. And so should we expect -- is that what's driving that and should we expect tighter spreads to kind of persist a little bit?

Yes, I would expect there to be continued pressure there for the near term.

That’s really what's exciting about bringing on Balboa. And again, this was -- Balboa was a way to use $800 million or $660 million of excess liquidity as well and put it to work, and even a 10% will help.

Got it. Okay. And on mortgage, Nicole, could you help me understand why the HFS portfolio didn't grow, given the production you had and the implied kind of sales volume? I guess did you balance sheet any of that? And I guess if you are, what percent of production are you balance sheet in?

We have not changed any of that strategy at all. What it really comes down to is that the production as it slowed, it really slowed the last four to six weeks of the quarter. And so you think about the held for sale piece being a bucket that empties out the bottom and you refill the top. And so the last six weeks of the quarter is really when we saw that production start to slow. A lot of that has to do with the holidays. I know that sounds superficial, but a lot of it does. People just don't move during that time. And so we've already seen it kind of come back up a little bit in January, closer to where we were in November.

Got it. Okay. And I think you mentioned this in the deck or maybe it was released somewhere, but you expected mortgage expenses to go down I think in the first quarter. I guess just given that production was down this quarter, why didn't we see more of a decline in mortgage expenses this quarter, Nicole?

Yes, and that's exactly for what I just said. The fact that the production slows the last four to six weeks, there's always a lag. And so if production has gone down in October, then we would have seen those expenses start being cut November, December. But because the production flowed in those last six weeks of the quarter, four to six weeks of the quarter, so that's why we're saying that there's that lag and it's already starting to come out in January.

Got it. Thank you. And if you could help me tease apart the expense trajectory going forward, maybe setting mortgage and Balboa aside, a number of banks have talked about inflationary pressures this year and you all have been pretty successful in hiring, and I'm assuming that will continue going forward. And so when you think about the core bank, kind of setting aside Balboa and mortgage, what are your expense growth expectations there, Nicole?

Yes. So our expenses, there are a very minimal increase. Like Palmer mentioned, for example, this last year, we were able to hire 17 new bankers, but we had 21 exit. And so we were actually down a couple hundred thousand dollars of expense in the core bank because of that attrition and that rehiring. And so we continue to find ways to kind of pay for that along the way. So minimal increases. I will say that I think wage inflation is real. And so we are obviously battling that, but we're trying to find other ways through lease expense or through other areas to kind of compensate and to pay for those other increases.

Got it. Thank you for that. Thanks for that color. And on the municipal balances, Nicole, I think those peaked out about 750 in the first quarter of 2020. They're down about 24% from there to today. I guess what's driving that and what should our growth expectations be for that business line going forward?

Municipal loans or municipal bonds?

Municipal loans, sorry. I should have been more specific.

Municipal loans. Okay, sorry. When you said municipal, I was looking at the bond portfolio and then I wasn't following --

No, I meant the wrong portfolio. Sorry about that.

Okay, got it. Sorry, that was my looking at the wrong thing to the wrong thing. Some of that has just been the economy and COVID and just some of that coming down. But when we look at our 2022 growth rates, we don't see a lot of that growing. That's not where we're putting a lot of the growth.

Got it. Okay. And if I could sneak just a couple superficial ones in left. The 40% variable rate, does all of that reprice within 12 months?

Yes.

Okay.

And then we have that --

Yes, the extra 10%. I just wanted to confirm that the variable rate. There wasn’t anything going on there. And then -- I noticed a small percent of your asset base, but just within your securities portfolio, what's the duration of it and what's the percentage that's floating rate?

Sure. We've got about 8% that’s variable rate in the bond book, and it's about a three-year duration.

Awesome. Thank you very much for taking all my questions.

Sure.

Go ahead, Nicole.

I was going to say that other 10% that I said -- the fixed rate loans at the variable, they are also within 12 months. They're actually closer to less than 10 months.

Got it. Thank you very much for all the color and the time this morning. I appreciate it.

Sure. Thanks, Brody.

Thank you. This concludes today's Q&A session. I'll now pass the call back to Palmer Proctor, CEO, for any closing remarks.

Great. Thank you, Emma. I'd like to thank everybody again for listening to our fourth quarter and full year 2021 earnings results. And I'd also like to give a special shout out and thanks to all my Ameris teammates, this hard work and dedication made this year so extraordinary for Ameris and all of our stakeholders. And as we look forward into 2022, I think we're extremely well positioned to capitalize on our opportunities and I continue to thank you for your support. That concludes our call.

This concludes Ameris Bank fourth quarter earnings conference call. Please enjoy the rest of your day. You may now disconnect your lines.